Sterling
The Pound suffered its heaviest losses since the ‘Brexit’ vote yesterday as markets reacted fiercely to a four-point stimulus package from the Bank of England.
For the first time since 2009 the BoE slashed interest rates, bringing the headline rate down from 0.50% to a new record low of 0.25%. The UK central bank also restarted its QE bond-buying scheme, adding another £60 billion to the asset purchasing target, and allocated an additional £10 billion for the purchase of corporate bonds from firms ‘making a material contribution to the UK economy’. The bank also launched a £100 billion ‘term funding scheme’ (TFS), aimed at ensuring that commercial banks are able to pass on the record low interest rates to the real economy.
In addition to the measures announced today, Governor Mark Carney suggested that rates would probably fall again over the next few months unless the domestic economy performed better-than-anticipated. The bank now expects the UK to grow by just 0.8% next year, marking a massive downgrade on previous estimates of 2.3%. The BoE has never before adjusted its growth forecasts to such an extent between inflation forecasts.
Euro
The Pound to Euro exchange rate plummeted by almost two cents in the immediate aftermath of the Bank of England’s ‘Super Thursday’ set of announcements.
Sterling’s value instantly dropped when Carney announced the four-point stimulus package and traders punished the Pound further during the Governor’s press conference when he declared that policymakers intend to increase all four elements of the package in the future. Carney noted that the schemes would not be bolstered if the economy performed better-than-forecast but, with the BoE forecasting 0.8% growth next year and many analysts anticipating a recession, there appears to be potential for even more aggressive stimulus over the next 12-18 months.
US Dollar
Sterling plunged over two cents against the US Dollar yesterday in reaction to the Bank of England’s quadrilateral new stimulus plan.
The aggressive easing plan, which Governor Mark Carney described as an ‘exceptional package of measures’, came in response to the recent downturn in private sector activity, which analysts said was a direct consequence of Britain’s decision to vote to leave the European Union. Taking into account the available post-referendum data, it looks like the UK economy could have contracted 0.4% since the vote.
The BoE’s stimulus package is designed to encourage lending and stimulate demand in the real economy, however, even with the new measures, the UK central bank now sees growth of just 0.8% in 2018 and 1.8% in 2018 – down from forecasts of 2.3% previously. Due to the devaluation of Sterling, inflation is forecast to rise much faster than initially expected. UK CPI is tipped to hit 1.9% in 2017 and 2.4% in 2018 – up from 1.9% and 2.1% previously. However, the BoE made it clear today that, even with inflation likely to overshoot the 2.0% target in the medium term, it still intends to push ahead with further easing measures.
GBP/USD’s losses could be exacerbated today if the July non-farm payroll report comes in positively. Anything above the median consensus of 175,000 would be liable to bolster the appeal of the ‘Greenback’, while it could take a score of 120,000 or less to give Sterling the impetus to mount a rally.
Canadian Dollar
The Pound to Canadian Dollar exchange rate tumbled almost four cents yesterday to strike a fortnightly low as markets punished the Pound following the BoE’s robust new stimulus package. In addition to pushing the yield down on UK Treasury yields – thus making them less attractive to foreign investors – the powerful package had the added effect of stoking investors’ appetite for risk, which breathed life into the commodity-sensitive ‘Loonie’ and other risk-sensitive currencies.
In Canada this afternoon’s data is expected to show that unemployment rose from 6.8% to 6.9% in July, which could give Sterling a little – stress little – bit of a boost.
Australian Dollar
Sterling careened lower by around four cents yesterday to strike a three-week low against the Australian Dollar. The BoE’s ‘Super Thursday’ announcements lived up to the bill this time around and demand for the UK currency evaporated in response.
The only respite for the Pound was Governor Mark Carney’s insistence that he was not a fan of negative interest rates before dismissing the prospect of printing so-called ‘helicopter money’ for UK citizens as an unmerited ‘flight of fancy’.
New Zealand Dollar
The risk-correlated ‘Kiwi’ Dollar surged higher by almost four cents versus the Pound yesterday as decisive BoE stimulus measures inflicted severe pain on the Pound and breathed life into perceived riskier assets such as the New Zealand Dollar.
Data Released
13:30 USD Change in Non-farm Payrolls (JUL) High 175k
13:30 USD Unemployment Rate (JUL) High 4.8%
13:30 USD Average Hourly Earnings (YoY) (JUL) Medium 2.6%
13:30 CAD Unemployment Rate (JUL) High 6.9%
13:30 CAD Net Change in Employment (JUL) High 10.0k